Silver-ETF fell by 24%, but silver fell by only 4%: Increased speculation before the budget became the reason; Know how right it is to invest now

On January 22, there was a sudden huge selloff in Silver Exchange Traded Funds (ETFs) in the Indian stock market. Funds like Tata Silver ETF fell by almost 24 per cent, while during the same period, silver prices on the Multi Commodity Exchange (MCX) fell by only 4 per cent.

In such a situation, the question in the minds of investors is that when the real price of silver fell by only 4%, then how did the ETFs tracking it fall by 24%? According to experts, this fall is not due to weakening of silver, but due to speculative premium unwinding in the Indian market before the budget.

What is speculative premium unwinding?

Speculative premium unwinding means that the price of something (such as a stock, commodity or ETF) in the market has increased due to speculation or rumors alone. This extra increased price (premium) is based on expectations, such as a policy change or good news. But when those expectations prove wrong or no change occurs, that extra value quickly diminishes.

Maximum decline of 17% in Tata Silver ETF

Silver ETF fell due to 3 reasons?

Betting Premium:In view of the Union Budget on February 1, there was heavy speculation in the prices of silver in the Indian market. Investors were hopeful that the government might change the import duty on silver in the budget.

In this expectation, Indian silver prices had gone far above international prices. In India, silver was trading at around $107 an ounce, while internationally its price was around $94. This $13 difference was too much.

Hopes of change dashed: As soon as there were indications that there would be no immediate relief on duties in the budget, that ‘extra premium’ started coming to an end. According to Harshal Dasani, Business Head, Invest PMS, this is not a deterioration in silver fundamentals but a correction of India-specific price distortions.

Selling pressure in ETF: Silver ETFs are based on domestic prices. When big and small investors started selling ETF units together to book profits, their prices fell much faster than MCX futures. It was a process of bringing the prices in the market at par with the international and domestic physical prices.

What should investors do now?

Even though prices are seeing volatility, the fundamentals of silver are still strong. Tanvi Kanchan of Anand Rathi Share & Stock Brokers has some tips for investors:

Industrial demand is strong: There remains record demand for silver in solar panels, electric vehicles (EV) and AI infrastructure. This decline could be an investment opportunity.

Do not invest lump sum money: After this huge rise in silver, investing all the money at once can be risky. Adopt the strategy of ‘buy on dip’.

Buy slowly over the next few weeks: Spread your investments over the next few weeks or months. This will keep you safe in case of further fall.

Now know about silver ETF

What is a silver ETF? Silver ETF i.e. Silver Exchange Traded Fund. To understand this, just know that this is a fund which is based on silver prices. You invest money in it, and this money increases and decreases according to the price of silver.

But in this you do not need to buy real silver. Neither safe nor locker is required. All this is done by the fund house, and you can simply buy and sell it like any share on a stock exchange (like NSE or BSE) through a demat account.

How does this work? The fund house of a silver ETF buys real silver, which is 99.9% pure. Now the price of the ETF you buy is based on the market price of silver. If the price of silver rises, so does your ETF. And it is also easy to sell, just sell it in the stock market during trading time.

There are many benefits of investing in silver ETF

You can buy silver even in small quantities: Buy silver units through ETF. This makes it easier to buy silver in small quantities. The price of 1 unit of Silver ETF is currently around Rs 150. That means you can start investing in it with Rs 150.

Silver remains safe: Electronic silver is held in a demat account in which only annual demat charges have to be paid. Also there is no fear of theft. Apart from the risk of theft of physical silver, there is also expenditure on its security.

Ease of Doing Business: Silver ETFs can be bought and sold instantly without any hassle. That means you can sell it whenever you need money.

There are some risks too

Price Movement: Silver prices sometimes change rapidly. If the market falls, the value of the ETF will also fall.

Dependent on industrial demand: Apart from jewellery, silver is used in solar panels, electronics, and medical equipment. If demand in these industries decreases, the price of silver may also be affected.